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4 Reasons to Save in a Roth 401(k)

By WTOP Staff

Employers are increasingly offering a Roth 401(k) option in their retirement plan. Half of employers now provide employees with a Roth 401(k) plan, up significantly from 11 percent in 2007, according to an Aon Hewitt survey. Employees at these firms get to choose whether to pay tax on their retirement savings up front or during withdrawal. But only 11 percent of eligible workers opt into the Roth.

With a traditional 401(k) plan, you contribute to the account on a pre-tax basis. That means you will get a tax break up front, but you will have to pay tax when you withdraw the money. In contrast, you contribute to a Roth 401(k) after paying tax. The big benefit is that the money in your Roth 401(k) will be tax-free when you take distributions in retirement. Roth 401(k)s also have other perks including additional flexibility in retirement. Here’s how to decide if it’s worth your time to log into your 401(k) account to make the change:

Tax diversification. Having a tax-free income source is a great tool in retirement. Most people will have multiple sources of retirement income such as a Social Security benefit, traditional 401(k) withdrawals and investment income from your taxable brokerage account. All of this taxable income can push you higher in the tax bracket and will affect how your Social Security benefit is taxed. More income can lead to a greater percentage of your Social Security benefit being taxed. You can keep your overall taxable income down by withdrawing some funds from your traditional 401(k) and some funds from a Roth. This can help you avoid a higher tax bracket and lower your overall tax liability. Having some retirement money in a Roth account will give you this flexibility in retirement.

No required minimum distributions. When you reach age 70 1/2, you will need to start taking withdrawals from your traditional 401(k)s and IRAs. Even if you don’t need the income immediately, you still need to take a distribution each year and pay tax on it. Roth accounts do not require withdrawals in retirement, and can also be passed on to heirs.

Employer matching goes in the traditional 401(k). It’s important to take full advantage of the employer match part of your 401(k) contribution if this is available. It’s the easiest money you will ever make. The company contribution is pre-tax and will go in your traditional 401(k). So by contributing to the Roth 401(k), you will have some funds in the tax-free bucket and some in the pre-tax bucket. It’s good to have more choices when it’s time to take withdrawals so you can minimize your tax liability.

Save more. The 2014 annual contribution limit for 401(k)s is $17,500 for those under 50. If you are 50 or older, you can contribute an additional catch-up amount of $5,500. These contribution limits apply to both the traditional and Roth 401(k). However, a dollar in a Roth 401(k) is more valuable than a dollar in a traditional 401(k) because the funds in your Roth 401(k) plan won’t be taxed when you take a distribution. So for investors who want to save more in their tax-advantaged account, the Roth 401(k) is the way to do it. Paying tax up front is a little painful, but you’ll ultimately end up with more money in retirement.

Consider a Roth 401(k). Taxes are one of the biggest expenses we have, and it’s worth our time to plan for it. Investing in a Roth 401(k) and Roth IRA will give you a big tool to help minimize your tax liability in retirement. It’s best to have assets in pre-tax, tax-free and low tax (capital gain and dividend) accounts. The Roth 401(k) is particularly suited for young people who are in a lower tax bracket and have a lot of working years left ahead of them. A Roth 401(k) can then grow tax-free and compound over many years. But the Roth 401(k) is also a great tool for older workers who want to avoid a large tax bill in retirement.

Joe Udo is a stay at home dad who blogs at Retire by 40.

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4 Reasons to Save in a Roth 401(k) originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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